Marathon Petroleum Is a Terrific Buy

Marathon Petroleum (MPC) announced fourth quarter ended December 31, 2015 total revenue of $15.6 billion, down 30 percent year-over-year from $22.3 billion during the same period last year.

Marathon declared fourth quarter of 2015 net income of $187 million or $0.35 per diluted share, down 77 percent year-over-year from $798 million or $1.43 per diluted share in fourth quarter of 2014.

The downstream petroleum products supplier reported a continued decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with the increasing exploration costs, eating into the company’s key margins.

Strong growth

Although, Marathon witnessed 13 percent year-over-year increase in its complete fiscal year 2015 total earnings to $2.8 billion or $5.26 per diluted share compared to net earnings of $2.5 billion or $4.39 per diluted share during 2014 still, it illustrated year-over-year decline in net earnings for the fourth quarter of 2015 and mainly due to the expanding exploration costs and diminishing company margins.

The sequential reduction in total company cash flows for the fourth quarter of 2015 at $1.1 billion compared to $2.0 billion in third quarter of 2015 is mainly driven by an increase in working capital requirements, more cash capital expenses along with acquisition spending and investments, cash usage in the strategic MarkWest acquisition and for returning a majority of the invested capital to the key shareholders in form of dividend and share repurchases.

Marathon is strategically employing the cash flow from operations during the quarter in its well-planned growth activities while delivering attractive shareholder returns which is believed to attract more investors and thus, further enhance the company’s bottom line, encouraging it to invest thoughtfully and assertively.

Marathon is notably increasing it's sequential and year-over-year dividend distributions at a CAGR of 29.5 percent since the planned spin-off and recently, the Board of Directors at Marathon Petroleum Corporation declared $0.32 per share of dividend on its common stock payable March 10, 2016 to the key stakeholders as of February 17, 2016 which is in line with its continued commitment to deliver enhanced shareholder returns.

Strong outlook

Marathon has also provided detailed production outlook for first quarter of 2016 and estimates total throughput for Gulf Coast region and Midwest region to be 1,175 MBD and 625 MBD respectively and thus making total MPC crude throughput at 1,700 MBD which is lesser than total throughout for both these regions last year and primarily due to the company’s key strategy to minimize core capital expenditures while preserving cash.

The unique cash preserving strategy of Marathon by delaying all major capital expenditures, minimizing non-core expenses and reducing key liquids production is expected to support the company in preserving significant cash while offering sustainable shareholder returns.

Marathon has made a significant improvement on the consolidation of captured retail locations and concluded the planned integration of MarkWest and MPLX.

Importantly, the company has strategically returned nearly $1.6 billion to the key stakeholders during 2015 that includes $362 million during the fourth quarter which is well in line with its continued commitment to deliver attractive shareholder returns. MPLX distribution expansion is recorded at 29 percent for 2015, with modified 2016 distribution expansion estimate in 12 to 15 percent range. Moreover, MPC has strategically declared superior-return consolidated $2 billion of multi-year investment schedule at its Galveston Bay refinery which is believed to develop it into an outstanding refining complex.

TheStreet Ratings team rates Marathon Petroleum Corp as a “Hold” with a ratings score of ‘C+’ and primarily driven by a mix of the company’s key strengths and weaknesses and with only a little evidence to justify the stock’s actual price performance. The company's major strengths are observed in several areas, like its logical valuation levels, usually robust financial position with reasonably lower debt levels and impressive return on equity. Contrastingly, certain weaknesses include weak profit margins, poor net income growth, and usually unacceptable stock price performance.

The consensus estimate among 23 polled investment analysts evaluating Marathon Petroleum Corp. suggests that the company would outperform the market. This consensus estimate is maintained since the investment analyst’s sentiments declined on Jun 30, 2011. The earlier consensus estimate suggested investors to buy equity in the company.

A majority of the key investment analysts are extremely positive about the long-term growth prospects of Marathon considering its significant growth potential but somewhat weaker financial position.

Conclusion

Overall, the investors are advised to “Hold” their position in Marathon Petroleum Corporation considering its notable growth prospects with PEG ratio of 0.74, indicating healthy company growth and comparable to the industry’s growth average of 0.73. The trailing P/E and forward P/E ratios of 5.74 and 6.09 respectively depicts logically valued stock and marginally better than the industry’s average P/E of 13.05. The profit margin of 4.42% seems satisfactory. However, Marathon needs to optimize its debt-burdened balance sheet with significant total debt of $6.69 billion against weaker total cash position of $2.04 billion only, restricting the company to make future growth investments.